Timken Co (TKR) 2003 Q3 法說會逐字稿

Good morning. My name is ame the ris and I will be your Conference Facilitator. At this time I I would like to welcome everyone to The Timken Company third quarter earnings conference call. You'll lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. Please limit yourselves to one question. If you would like to withdraw your question, press star, then the number 2 on your telephone keypad. Thank you. Mr. Kevin Beck, you may begin your conference.

Thank you and welcome to our third quarter conference call this call is scheduled for one hour. I'm Kevin Beck Manager of Investor Relations and with me today is Jim Griffith, President and Chief Executive Officer, Bill Bowling Executive Vice-President and Chief Operating Officer and President of our Steel Group and Glenn Eisenberg Executive Vice-President-Finance and Administration and Chief Financial Officer and Sallie Bailey Senior Vice President of Finance and Controller.

Before we go any further, I want to make the following statement concerning our safe harbor protection provided under the securities litigation act of 1995. Certain statements made in this teleconference including statements made regarding the company’s forecasts, beliefs and expectations that are not historical in nature are forward-looking statements within the meaning of the act.

Timken cautions that actual results may differ materially from those projected or implied and forward-looking statements due to a variety of important factors.

These additional factors are described in greater in the company's prospectus supplements dated February 11, and October 15 of 2003 for the offerings of the company's common stock as well as the company's annual report on form 10-K for year ended December 31, 2002, the company's 2002 annual report, page 47, and the first and second quarter forms 10-Q and the press release we issued today.

The company undertakes no obligation to update or revise any forward-looking statements. Our press release announcing results for first quarter is available on our website, www.Timken.com. Our comments today will focus on our financial results excluding the impact of special items. A reconciliation between GAAP and non-GAAP financial information is included as a part of the release. Also please note that this webcast contains time sensitive information that is accurate only only aof okay 23, 2003, the date of this live broad catches the call is the property of the Timken company and should not be redistributed or rebroadcast in any form without the written consent of the company. With that I'll turn over the Jim.

Thanks, Kevin good morning, everyone, and thank you for joining us. Looking back over the perform an of the Timken company in the third quarter, there are accomplishments in which we can take pride.

There are also areas of performance that are not satisfactory and do not meet the performance expectations we've set for ourselves or those set by our shareholders. As you have seen from our release sales for the company are up significantly over last year, driven primarily by the Torrington acquisition. Traditional taper bearing sales are also up over last year's levels. We were able to improve our sales performance in the face weak industrial markets and falling North American automobile production. Earnings for the quarter excluding special items, were at the high end of the guidance range provided earlier, and we are confirming our estimate of 45 to 60 cents per diluted share excluding special items for the year. We also recognize that earning levels generated are not satisfactory. The actions we reviewed with you last month are improving earnings levels as the impact of our cost reduction and business growth initiatives impacted September performance and will impact the fourth quarter and next year's performance levels.

During the third quarter total debt was reduced, confirming our commitment to maintain a strong balance sheet and aggressively pursue debt reduction. We continue to realize benefits from the Torrington acquisition. Through the third quarter we had achieved $15 million in cost savings and are well on our way to achieve the $20 million savings commitment for 2003 made when the acquisition was announced.

The savings are coming from the following areas: Over half the savings result from the elimination of duplicate personnel in both sales and marketing and our administrative support staff. About 250 positions have been eliminated since the beginning of the year. This also includes cost saved as we closed sales offices and other facilities about one-third of the savings results from combining the company's purchases to reduce the cost of supplies, materials, and services.

The balance comes pr a variety of areas where costs are being reduced due to the acquisition. Additionally, we are seeing the combination of the two companies create marketing opportunities that would not have been available to the two companies on a stand-alone basis. At Honda a traditional Timken customer, we have the opportunity to present proposals for new fuel efficient needle bearings for 2006 model year transmissions. At Daimler Chrysler we Reynolds our combined strength to obtain a three-year $75 million steering contract. In Brazil we are growing our steering column business by $13 million a year starting in 2004 by leveraging the combined capabilities of our Brazilian plant that came with the Torrington acquisition, and Timken's customer service, service engineering and sales and marking capabilities.

Now let's review the performance of our automotive and industrial groups before I turn the mike over to Bill to review our steel group. The profitability numbers we will review exclude the impact of special items. Automotive sales in the third quarter were $347 million, up from $185 million last year. The acquisition of Torrington accounted for most of this increase. Traditional tapered bearing sales were up about $10 million versus last year. This growth was achieved in North America where light truck production decline 2% and medium and heavy duty production declined by 11%.

New product launches at Ford and Nissan contributed to the sales improvement. Needle bearing sales in the automotive business were impacted by North American big three passenger car productions that decline 20% in the third quarter versus last year reflecting the big three's drive to reduce vehicle in inventories. We expect vehicle production to pick up in the fourth quarter.

EBIT for the seasonally low third quarter was a loss of $8.5 million versus a loss of $4.1 million last year. For the traditional Timken bearing business, the loss was about equal to last year. During the quarter we announced the reorganization of the automotive group to more effectively and quickly resolve the rationalization issues at both Timken and Torrington that have been impacting the group's performance. These were covered with you in earlier releases. I can report the following status on the actions being taken.

In total, we have reduced the head count in the automotive group by 450 people in the third quarter. September reductions were ahead of planned levels. The rationalization of the North American needle bearing production is nearing completion. Only a few pieces of major equipment need to be relocated, and these are scheduled to be complete by early December. The projected project targeted head count reduction of 190 with 180 having been removed already.

The European rationalization between Germany and the Czech Republic has been stabilized in terms of performance and production. We have accordingly reduced the work force at the German facility.

This month we celebrated the dedication of the new advanced green products facility, a manufacturing joint venture to produce hot forged, cold forged, and machine bearings used in high bearing manufacturing. We have experienced some new process start-up problems and booked a $1.7 million hit to earnings in September. We are moving aggressively to build volume at the facility to enable the removal of the fixed costs at existing facilities.

As I mentioned earlier, we are continuing to make progress on the operational issues that have impacted the performance this year we will see automotive performance improve in the fourth quarter and next year.

The industrial group continues to be the bright spot of our performance for the year. Sales at $387 million were up from $240 million last year. The impact of currency exchange beneficially impacted the sales value. EBIT of $35 million in the third quarter was up from $24 million last year. Excluding Torrington's third quarter -- excuse me. Excluding Torrington, third quarter sales were up $22 million over the last year and EBIT was up $6 million.

The industrial group benefited from continued growth in the automotive after market sector, improved performance in the rail segment and in Europe, exiting of low margin business, and manufacturing cost reductions. Continued weakness in industrial markets and high levels of distributor inventories for Torrington industrial products dampened the positive impact of those initiatives. We are not seeing the industrial recovery in North America which is talked about in the press and indicated by some economic indicators.

However, we continue to position our business to take full advantage of improved industrial demand when it occurs and to provide continuing strong performance in markets remain stagnant.

Now Bill will review our steel business.

Thank you, Jim. The steel group continues to face similar challenges as last quarter. Lower sales and production and higher raw material and energy costs have lowered profits from last year. Steel group net sales including intersegment sales finished the quarter at $237 million, down 4%, and $10 million from a third quarter of 2002.

Third quarter sales to automotive customers were up last year by 1% despite a 5% lower level of automotive and light truck production. Sales of external bearing customers were 9% less than a year ago, continuing the weak trend that we have seen all year.

In at the third quarter we continued to gain penetration for our competition in our industrial sales segment, SST as the steel industry continues to restructure. All country sales were up over the sales of a year ago and we expect further strengthening for the sales of this year. Our sales are a small percentage of our total sales mix.

Service to steel centers and our tool steel distribution business were worse than last year and continue to be weak as a result of low overall industrial production. The aerospace business continues to be beak weak as the majority our business is for commercial airline applications. Intersegment sales the impact of the previously announced bearing manufacturing strategy initiative is affecting the steel group, as expected. A portion of bearing production from tubing to hot forming processes which use solid bar, our automotive group will reduce total manufacturing costs. Those cost reductions will show in the automotive group improved margins. To date the reduction of intersegment tubing shipments in our steel group is more than offsetting the penetration gains made in other market segments.

Our capacity utilization in the third quarter was 65 to 75% varying by business and product which was lower than last year in the second quarter this year. In response, we have lowered our work schedules and our manning.

In the third quarter we had a loss of $5.6 million before interest and taxes, down from an EBIT of $5.6 million in the third quarter of 2002. Price increases during the quarter were more than offset by extremely high raw material and natural gas costs. In addition, plant operations were intermittently curtailed during the quarter to control labor costs and inventory levels in response to lower sales.

In the fourth quarter raw material and energy costs will con to be high compared on both last year and the three quarters of this year.

In the third quarter competition remains strong in our industries, both from domestic and international competitors. International competition was especially strong in products and from countries excluded from the 2001 tariffs. This competition has resulted in continued and considerable price pressure. In response, we continue to increase penetration and more margin products at the expense of weak competitors, we decreased our earnings margin however as we increase the amount of lower margin products in our overall product mix.

Republic engineered products who compete with us in a narrow range of our product mix filed for chapter 11 bankruptcy protection on October 6. In the third quarter leading up to this filing we saw little concern for the market Place in the form of increased orders. We are now seeing some additional orders; however, it is too early in the process to speculate on the ultimate effects of this event. Raw material surcharges are included in the supply agreements we have with many customers. In addition, we have implemented price increases to recover a portion of these higher costs for customers with whom we do not have contracts. Furthermore, we have increased prices for products requiring higher levels of natural gas in their processing.

Unfortunately, since these surcharges and price increases rise our raw material and increases and do not fully cover them there was continued pressure on margins in the third quarter. This pressure continues into the fourth quarter.

We are in the process of negotiating many customer contracts for 2004, we are adding provisions for scrap, alloy, and energy surcharges, and considering additional price increases. The 201 tariffs announced by President Bush in March of last year are levied on imports of products competing for approximately 30% of the steel group's sales dollars. International Trade Commission has issued its findings from its mid-term review.

The President will decide before the end of the year to continue, discontinue, or modify the original order. It is imperative that the 201 remedy stay in place as originally order through their full term in March of 2005 to allow the steel industry to continue its considerable restructuring. Glenn.

Thanks, Bill. My comments, consistent with those by Jim and Bill, will exclude the impact of special items, and in the third quarter of 2003, special items totalled $8 million driven by the integration of Torrington, and in the third quarter of 2002 these special items were $12 million for restructuring and reorganization expenses relating to our manufacturing strategy initiative.

Sales for the quarter were $938 million, up around 50% over last year. Excluding the acquisition of Torrington, sales were up 5%, approximately half was organic and the remainder of the impact of foreign currency translation. While our sales were up slightly. Our margins have declined.

EBIT was $18 million or 1.9% of sales, approximately 210 basis points below last year with declines in gross margin only slightly offset by lower SG&A. As you heard from Jim and Bill, relative to last year, gross profit was negatively impacted by higher scrap and energy costs in our steel group and performance issues in our automotive group.

Interest for the quarter was $12 million or $4 million over last year, driven by higher debt associated with the acquisition. With the 38% tax rate, net income for the quarter was $3.6 million, $7 million below last year.

Our average shares outstanding, assuming dilution, increased to $85.7 million for the quarter which included the 22 million shares that were issued in February to finance the Torrington acquisition. Earnings per share for the quarter was 4 cents down from 17 cents last year and in line with our guidance of 0 to 5 cents.

Year-to-date sales were $2.8 billion, 45% over last year or 7% excluding Torrington. Earnings per share was 40 cents for the nine months versus 68 cents last year. We continue to provide an estimate of the earnings impact of the toarg Torrington acquisition and anticipate that we will continue to be able to do this through the fourth quarter.

Excluding the impact of Torrington our year-to-date EPS would have been 51 cents. While Torrington is dilutive on a year-to-date basis we estimate that Torrington will be neutral to slightly acreetive for the full year and this is driven by synergies and a seasonality strong fourth quarter.

From a cash flow perspective, net cash provided by operating activities was close to break even year-to-date versus an inflow of $80 million last year. For 2003 we have contributed cash of nearly $170 million to our domestic pension plans, completing our planned contributions for the year. Last year we contributed approximately $100 million, $55 million of which was stock. Year-to-date capital expenditures were $81 million, up $21 million from last year, driven by the addition of Torrington, below depreciation and amortization-expense of $146 million. In July we sold a Japanese beetle bearing manufacturing joint venture with SK for $146 million. We have accrued approximately $30 million in taxes related to this and will pay this early next year.

Total debt ended the quarter at $939 million or 49% of total capital, approximately $80 million below second quarter. Moody's recently downgraded the company's rating from D double A 3 to B 1 negative outlook. With SAP we are create age triple B minus but remain on credit watch and will be meeting with them later this year.

The rating downgrade by Moody's to below investment grade has minimal investment options for the company at current on the ground levels it increases our interest in our revolving credit by approximately we remain firmly committed to further improving our balance sheet and using available cash from operations and other means to reduce debt.

In October the company offered 12.9 million shares of Of these shares 9.4 million were from Inger Sol Rand which they received in February as part of acquisition of Torrington and 3.5 million were new shares told by Timken. We used the proceeds of approximately $55 million on the new shares to reduce debt and further strengthen our balance sheet. We are maintaining our guidance for 2003 of 45 cents to 60 cents per diluted share excluding than special items, and as you heard this morning we are aggressively venging the company to improve profitability and position us for improved performance into next year. This concludes our formal remarks for this morning, and we would now be glad to answer any questions that you have.

At this time I would like to remind everyone, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

We'll pause for just a moment to compile the Q&A roster. You are continuing to pause for the Q&A roster. Your first question comes from Andrew Oven of Merrill Lynch.

Hi. It's Andrew Oven. In terms of Torrington industrial business, we continued to experience weakness. Could you break out the sources of weakness in the industrial business? We've spoken a lot about the auto business. Can we just highlight what's going on there?

That's a good question, Andrew. This is Jim Griffith.

Hi.

As we acquired Torrington, the industrial business was the weaker of the two businesses, and it was weak from a couple of points of view. It was weak because the industrial market in North America in the last four years has dropped by about 20%, and that's affected all the bearing companies, but Torrington had not gone through the rationalization of factories to take fixed costs out, and if you look at the announcements we have made with respect to the Darlington plant in the UK, the plant in rock forward Ford, Illinois and just this week the sale of the plant in Torrington, Connecticut, that was one of the key activities that we identified that we would have to undertake, and until that fixed cost is out of the system, then there will be weak earning power out of that business at the current levels.

The second issue which relates to, then, starting to bring the sales back to more normal levels is the fact that over the last three years Torrington had advanced sales into the industrial after market in North America, and had built up inventories that our distributors that are overhanging the market, and we have entered into agreements with those distributors to work off that inventory over the next number of months, and the number of months is influenced highly by their level of sales and their ability to take it into the marketplace.

Those are the two primary issues. One, the manufacturing issue we should have opinioned behind us by, say, the middle of next year. The other one depends on how the industrial markets come back when we will actually see it disappear.

Your competitor noted that while the absolute level of after mark inventories and the channels remain high, there appears to be some sequential improvement. Are you seeing that as well or ...

Yes. Although Torrington was an aberration in that market, and we play in that market from the Timken side as well, and we know that situation very well. We don't have this problem on the heritage-Timken side because we played the market a different way. In a sense you could say that IR was pushing earnings up in an effort to sell the company and extract value from it, and they had pushed more of that inventory than our competitors had over that period of time. But it will take some time.

Now, the flip side of that is we are seeing significant growth outside of North America where Torrington hadn't played, and that is some of the synergies that we're getting in international markets by taking the Torrington production and selling it in places like China and India, and that will also help us, in a sense, get that monkey off our back.

Your next question comes from Robert Schenosky of CIBC world market.

Hi. Actually , this is Carrie. Bob had to step away. Could you please comment on what the order trend has been like so far in the fourth quarter for your different end markets? And if that will continue into 2004?

Carrie, that's a great question. I will refuse to try to predict what's going to be into 2004 because the whole market is sitting and wondering when this industrial recovery will happen. On the bearing side, if I sort of segment the company, we have seen an increase in orders on the U.S. passenger car. This is the needle bearing side because, in fact, that production is up in that market. We have seen fairly stable to slightly down in the truck market in North America. And then generally across the industrial markets they're flat. There are some places they're up; there are some places they're down, but generally they're flat, and we don't see anything that would cause that to change in our order pattern yet. I'll let Bill answer from the steel side.

Well from the steel side our experience would be very similar. The good news so far is we have not seen the teg degradation of the December order book that we have been plagued with over the last couple of years. I wouldn't suggest that is a strength in the industrial markets but at least it seems the decline is somewhat stopped.

Your next question comes from Holden Lewis of BB&T.

Good morning, thank you. A couple of questions on sort of revenue side. The industrial business, the last couple of quarters you've seen sort of the organic growth, I guess, the Timken growth rate accelerate the last couple of quarters. That occurred in Q3 as well. You know, yet you're saying you're not seeing any real improvement from in the economy as a whole. Has the currency been a greater contributor or what do we credit the aceleration in your organic industrial revenues?

The growth in our industrial revenues tend to be the results of direct tactics that we're doing to try to grow our penetration in the market. Some of it is from new business initiatives that we have launched, that I think we've talked about for example, our engineers products business, some of our services businesses in the after market have done well. And especially our growth has been strong outside the United States where we have been focusing very hard on growing our position in the after market. Countries like China, like Australia are seeing record sales for us in those markets, and those are generally after market accounts in China it's some of the large infrastructure investment going on into that market. I don't think that's a trend that is too dissimilar from a number of our competitors.

Just on the currency one for that as well, organically industrial picked up around 9% in the third quarter over last year, and a little bit more than half of that, around half of that was from currency and the other half organic.

Your next question comes from Mark Parr of McDonald Investments.

Hi. Thank you very much. Good morning, guys.

Good morning.

I had a couple of questions. First of all, does the labor contract for the steel mills include a 40-hour guarantee for the rank and file?

There's a '2 hour guaranty.

32.

32 hours? Okay.

Be careful. There are also some escape valves in that that allow us to get away from that.

So I guess really what I was trying to get at when, Bill, you had indicated you had shut erred mills for a period of time, several days, whatever, a week out to ensure the weaker order books, and I was wondering if that required continuation of wages and benefits to the work force even though they were laid off.

No. That's a different issue than the big steel 40-hour versus 32- hour guaranty work week. We have in our contract trigger points once for two months we can blow those trigger points. We for all practical purposes just lay people off, and we are only obligated for the standard unemployment sub, et cetera. So when I reduced our force for all practical purposes, it would just be the normal unemployment compensation that I would be subjected, not guarantees.

Your next question comes from Gary McManus of JP Morgan.

Hi, everybody. Hey, I think, Glenn, in your prepared remarks you said that Torrington's diluted 11 cents thus far this year but it's going to be neutral for the year so you obviously are suggesting that Torrington is going to be accretive by about 11 cents in the fourth quarter. What kind of operating margins does Torrington need to do to achieve that kind of accretion in fourth quarter?

Rather than I guess get into the operating margins, just talk briefly about just Torrington overall. When you look at the performance of Torrington year-to-date, obviously below what our expectations were for the reasons that Jim had articulated, but from a seasonal standpoint, Torrington has historically had a strong fourth quarter that we still expect to have. Again, maybe tempered by the current environment. And then as well of the synergies that we're looking to realize this year, the bulk of the synergies come into the fourth quarter.

So the two, those two issues, the Thorpe normal seasonally high for them, the synergies would obviously occur for their strongest quarter of the year. So without getting or projecting what their margins will be, needless to say that's why we would expect them to have not unusual performance but what we would consider normal performance relative to year-to-date performance.

If I could add-on to that, Gary, the changes being made in the automotive business, if you recall, we talked about the nationalization that's almost done, and we're now shifting people out. We're satisfying a kick in productivity in the needle plants, in the 6 to 8% range in the fourth quarter versus the third quarter, second quarter levels, and all of that just translates into much better financial performance.

Your next question comes from Ron Speaker of Janus.

Could you speak to your working capital changes? It looks like you're going to consume some working capital in the first nine months of this year and in last quarter, and was that related primarily to the acquisitions?

When you look at the accompanying I guess first balance sheet and look at the working capital levels, we show from December to September, obviously, the bulk of the change on that would be just through the addition of Torrington. When you look at just the cash flows for the quarter, you know, we had a slight usage of cash coming from our working capital to the tune of give or take around $15 million. We do expect to continue to see improved working capital as we go into the fourth year. In part, some of it being seasonal but also just our continued management of working capital that we would expect to see a cash inflow as we finish up the year.

Your next question comes from Rich Von Carp of Stage Asset Management.

I've been answered. Thank you.

Your next question comes from Wendy Caplan of Wachovia Securities.

Hi. Thank you. You mentioned in the press release about some management changes in Europe. Can you talk some more about that and are there -- should we anticipate other -- I know auto was one that you talked about earlier, last month, but are there other changes in management that we should anticipate?

Wendy, obviously when you ask about that is correct you ask about a very sensitive issue, let me talk for a second about the changes that have happened in the auto business. Use that as the segue into that. Because some of them actually happened before the departure of Carl Kimberlink who was the president of business. Added in Europe a managing director of Europe and segmented the business to put a President of our automotive business in Europe to focus more attention to that area. We have recruited a new controller for our automotive business, and then have made some other moves at lower levels, and we are continuing to work in the automotive business to make the changes within that business that will make it more effective. Now, that is what was referred to in that comment in the release. Having said that, we have one additional change that is planned at the end of the year, and this is not a surprise to anybody who knows the company, that Bill Bowling has announced his retirement at the end of the year, and at some point we'll name a successor for him.

Our next question comes from Dominic Berloff of Longbow Research.

Hi, this is actually Chris Olin. One question for clarification. Were you talking a bit about Torrington adding 10 cents or eleven cents accretion for the fourth quarter but coming in at a lower range, would that suggest the core operations is going to lose money here? And if that's true I want to know actually what's the delta where we we're going to see the biggest weakness.

Again, Chris, I don't think we'll talk about the projections that will hit for the fourth quarter other than to say that the range of guidance is out there for what we expect to hit for the full year. We do have the expectations that Torrington will be accretive to us for the full year, so clearly it I am price plies a strong fourth quarter in Torrington relative to their nine months performance, and obviously the accretion is also relative to the performance of the base Timken business as well. But clearly our guidance and our belief at least as we stand today that Torrington will be accretive or at least neutral to accretive to us in our first year of ownership.

Next question comes from Adam Weiss of Hilton Investment Company.

Hi. On the Ingersoll call a couple of days ago they talked about subsidy payments being below what their expectations were. Can you comment on what your expectations are for this year and next year?

Adam, again, good question. This is one of those areas where you hate to make any comment because you're trying to predict a government action, but let me give a little background on the way those things are calculated. The government has a number of dumping orders that relate to different types of bearings. The ones that we've participated in most extensively over time have been the tapered actions. There were also some on ball bearings. And those are what affected Torrington disproportionately. What I think they were referring to was last year the work -- I forget what the term is.

Liquidation --

The liquidation of those CDO funds was biased toward the ball bearing side which could have impacted IR. This year we're anticipating it to be more biased toward the tapered bearing side, and that gives us more confidence that we'll have a better impact, higher level of benefit from that than they might say at this point in time.

At this time I would like to remind everyone in order to ask a question, please press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your next question comes from Mark Parr of McDonald Investments.

Hi, thank you. I was wondering on the debt side, Glenn, what sort of debt levels to you think would be required for Moody's to restore investment grade credit rating by the end of '04 or 05? Or maybe you want to answer ha a different way in terms of what you do you think is a reasonable expectation for Timken.

I'll do a little bit tongue and cheek and then do it more seriously but we feel a reasonable expectation is where we currently are. Obviously, our balance sheet has come down from the levels that we had acquired Torrington through cash generated through various mean but effectively our balance sheet's in good shape. Think where Moody's obviously reacted was that our operating performance, our earnings, our P&L was not where we had envisioned and clearly we would agree with that but clearly we have a very strong balance sheet after the quarter ended with additional equity and raised for strengthening our commitment to a strong balance sheet so Moody's did downgrade us to BA 1 with a negative outlook. Obviously, they're going to see that we did raise additional equity capital afterwards. They'll still review, by having a negative outlook, their assessment of the rating over the next year, and it's our belief that as we have strengthened the balance sheet as we improve our operating performance, hopefully that will weigh in our favor to get back above the investment grade line. As you know, with S&P we're still at our triple D minus level, we're under review for potential negative downgrade, and we'll have that meeting later this year, but, again, our -- we believe that we have a strong balance sheet and that our performance is improving and that as you look at ratings over time as opposed to as a snapshot, we believe that we have a strong company, a strong balance sheet and would warrant investment grade rating.

Your next question comes from Gary McManus of JP Morgan.

I some real quick questions related to the cash flow. The D&A, depreciation and amortorization was $57 million was up from like $48 million the second quarter. What's behind that?

Secondly, Glenn, I guess answering an earlier yes about the working capital I look at the accounts payable was a use of cash of about $78 million during the third quarter so if you could explain what's going on there. And third, where does the pension payment of $100 million, where does it show up on the cash flow?

Gary, let me answer the last first because the last two are the same. In our accounts payable line that you see on our cash flow statement, that does includes the pension contributions that we make, so the $77 million, if you will, of cash usage, again, all of that effectively was from our pension contribution. When you look at just the D&A as we go forward, we're still working and will have wrapped up our full purchase price accounting issues by the end of the year, so we make our best guesstimates as we go through, but we'll have that completed at the end of the year. Then you'll see a more stable level of D&A just subject to the normal purchases of CAPEX and depreciation.

Next question comes from Adam Weiss of Hilton Investment company.

I got cut off before. On these subsidy payments, Ingersoll is entitled to I guess 80% this year of the payments that you receive from Torrington, right?

That's correct.

So if they're saying that their payments are below what they estimated, then that's in effect the payment that Torrington is supposed to get or below their expectation.

Yes. The reality, though, Adam, is that the vast majority of any payments that Timken would get would be from the Heritage Timken company, and so the difference in terms of what IR was referring to is of a nominal value in terms of our forecast for us the big question is what will be liquidated on the tapered side, which is not something that they, Torrington, had any exposure to on a separate basis. There really are two separate pieces, and we do not see the change that IR might have been saying is significant to us or material to us.

One thing just to add as well, we'll have finality at least we believe, by round November the tenth on where the amount of the CDO payment that we would have receiving, assuming we receive a payment at that time, and obviously we'll put out an announcement assuming we receive it.

I just was handed a note which, this may help you understand the difference. IR has historically counted at least a portion of their CDO payments in their earnings. We have taken a much more conservative view and we treat those as an extraordinary item. We did it last year. We would plan to do it this year. So they are not counted in at all in any guidance that we've given on earnings.

Your next question comes from Holden Lewis of BB&T.

Yes, thank you. I'm sorry. Could you explain again, it look like the crude line spike and which I guess you're saying you moved a bunch of your pension costs through there, that line hasn't moved a great deal even though you've been making quite a few pension costs, and it looks like the other line in the long tem liabilities came down by some amount. Was this a shifting from long-term to current?

On the other assets, now I guess you're focusing on the balance sheet versus the cash sheet, on other assets is where we would have our joint venture that we had with NTC that we subsequently have sold during the quarter and is now down. On the other one, you cut off on the beginning. part of that. Was that PP&E going up? I don't know if you can get back on the line, but if it was, the PP&E going up from the balance sheet that you're seeing as a result of the acquisition.

Thank you. Your next question comes from Robert Schenosky of CIBC World Market.

Carrie Capiello)) This is Carrie Capiello again. Bill, you mentioned raw material costs are expected to continue high in the fourth quarter. Does this also include graphite electrodes or do you have a different outlook.

We don't see any significant changes far as is as far as the electrodes. It's much more on the con consumable side.

Next question comes from Mark Parr of McDonald Investments.

Hi there. I just want to say that whoever is moderating this conference call really has a can I go trigger finger on the question button. But I would like to ask, Jim, if you could give us an update on the market share gains you expect to realize in the automotive business in '04 and '05. I know that you had indicated several calls ago an expectation for around $50 million in new business in '03 and another $50 million in '04. I'm wondering what you've been able to add to that as a result of Torrington synergies.

I would be simply speculating to try to give you an update on that number. What we have done at this point is simply forecasted for you the rate of new product introduction. Those are the numbers that I've been quoted in the past, and they range between $50 and $80 million a year, and The Heritage Timken company, probably 20 to $30 million a year in the needle business. Some part of that is simply replacing applications that we have had in the past with newer, more advanced product. Some part of it is real gain in penetration in dollars per vehicle. And I don't have the breakout of what those are, and when you're six months into a acquisition in the auto business at this point, we're seeing lots of indications of interest. I'm going to GM next week where we have got a solo show at GM tech world to be able to share our new products, new technology with GM, and that came directly as a result of Torrington-Timken connection. But it's way too early to try to project what that means in terms of penetration.

Thank you.

Next question comes from Adam Weiss of tilt on investment company.

I got cut off for the second time. Can you comment on the impact of currency on the earnings? I'm sorry. If you haven't already.

No, Adam. We have not. We have commented on it relative to our revenues where again half of the organic growth or call it 2, 2-1/2%. We benefitted from, as an increase, due to currency. We also commented that it would have a slightly higher impact on our industrial business given the amount of international exposure we have relative to our automotive or steel. On the earnings, we don't provide a number for the currency. It's not a large number relative to that we have a smaller profitability, if you will, over in international earnings than we do versus domestic, so not a meaningful contribution or impact from currency, a greater impact on our revenues.

And with respect to the pension, the cash contributions roughly equal that you show on the P&L?

We actually would make greater or we have made greater contributions, cash contributions to our pension than the expense that we have on our P&L.

Thank you.

At this time there are no further questions. Gentlemen, are there any closing remarks?

Yes, I'd like to turn the call over to Jim Griffith with some closing remarks, please.

Well, thank you all for your interest and the lively questions, I will apologize for the quick trigger finger we had set up to try to make sure everyone gets a chance to ask questions, and we'll work on tuning that a little bit for the next time. While Timken's dealing with a great numbers of challenges, the company is continuing to grow despite a very sluggish recovery in our primary market, the U.S. economy. We're pleased that the sales increase that we have achieved on top of the -- of that contributed by the Torrington acquisition.

We expect that the new products in our pipeline and the new business activities will continue to foster growth. We believe strongly that the Torrington acquisition was the right move and that we will derive long-term benefit from the addiction of the new products and technologies that Torrington has brought us, as we further integrate Torrington and correct the operational issues that have impacted our performance this year, the benefits of the acquisition will be more evident.

We are also proud of the progress we have made in reducing our debt, maintaining a strong balance sheet. will continue to be a key focus. With these and additional actions to reduce our costs, we're building a is on solid foundation for the future. Thank you very much.

Thanks, Jim.

If you have further questions my name is Kevin Beck and I'm the manager of investor relations I can can reached after (330)471-7181 and this concludes our call.

Thank you for joining today's Timken Company third quarter earnings conference call. You may all disconnect